INTRODUCTION

A Financial System is a composition of various

institutions, markets, regulations and laws, practices,
money transactions, claims and liabilities.

The word "system", in the term "financial system", implies

a set of complex and closely connected institutions, agents,
practices, markets, transactions, claims, and liabilities in
the economy. The financial system is concerned about
money, credit and finance-the three terms are intimately
related yet are somewhat different from each other. Indian
financial system consists of financial market, financial
instruments, financial intermediaries and financial services.

According to Dr.Prasanna Chandra, “the financial system

consists of a variety of financial intermediaries, markets
and instruments that are related to each other. it provides
the principal means by which savings are transformed into
investment”.

Financial systems are comprised into 4 parts. They are:-

Financial institutions
Financial markets
Financial intermediaries
Financial services
FUNCTIONS OF FINANCIAL SYSTEM
The financial system performs the following functions that
are inter-related and are essential for the development
process of a modern economy.

Payment system
Mobilization and allocation of funds
Risk management
Price information for decentralized decision making
Dealing with the problem of incentives

1) Payment system
The commercial banking system constitutes the
payment system in the financial market. The credit card
and debit card companies play a vital role with large
number of commercial banks having their independent
credit card and debit card divisions, the debit and credit
card system becomes a part of banking system.

2) Mobilization and allocation of funds

The financial intermediaries both banking and non-
banking plays a crucial role in mobilizing plays a crucial
role in mobilizing funds from the persons. The financial
markets also help in efficient allocation of scarce financial
resources and individuals and households are provided the
opportunity to invest their financial resources in attractive
financial avenues of investment.
3) Risk management
A developed financial system provides a variety of
financial instruments that enable financial intermediaries to
mobilize, price and exchange risk. The three basic methods
of managing risk are: hedging, diversification and
insurance.Hedging would require movement from a risk
loaded asset to a risk free-asset. Diversification involves
pooling and sub-division of risks. Insurance enables the
insured to enjoy the economic benefits of ownership while
eliminating the possible losses.

4) Price information of decentralized decision-making

Financial system helps decentralized decision-
making.the money market offers short term credit financial
instruments and the capital market offers long term credit
financial instruments. Information pertaining to these
instruments is readily made available to all financial
investors so that they can determine their portfolio
allocations based on their risk taking abilities and
understanding of the financial markets.

5) Dealing with the problem of incentives

When financial information is not equally available
to all, the problem of informational inequality comes into
existence. This leads to the problems of moral hazard and
adverse selection. These problems are known as agency
problems.
FINANCIAL INSTITUTIONS

Financial institutions are classified into banking and

non-banking financial institutions.
A banking company is an institution to accept deposit of
money from the public withdrawable by cheque.thus, the
combination of the functions of acceptance of public
deposits and withdrawable of money by cheque by any
institution cannot be performed with the approval of RBI.
A banking company accepts short term and long term
deposits up to an unlimited extent and money can be
withdrawn by drawing cheques on the accounts maintained
with it.
Indian financial system has strong groups of financial
institutions which are different in nature from banks. These
institutions are called as non-bank financial institutions.
A non-bank finance company can be defined as an
institution, which mobilizes the savings of the community
and diverts them for financing different activities.
Investment companies, investment trusts, nidhis, hire
purchase and leasing companies and housing finance
companies specialize in giving loans for consumption,
commerce and trading purpose. They have local links and
they constitute small-scale decentralized sector of the
financial system in India.
FINANCIAL MARKET
A Financial Market is an institution that facilitates the
exchange of financial instruments such as deposits, loans,
corporate stocks and bonds, government bonds, etc. it is a
market where in financial instruments such as financial
claims, assets and securities are traded.
Financial markets are classified into 5 types:
1) Debt market and equity markets
The debt market is the financial market for fixed
claims and the equity market is the financial market for
residual claims.
2) Money and capital markets
The market for short term financial claims is known
as money market and the market for long term financial
claims is known as capital market
3) Primary and secondary markets
The market in which issuers sell new claims is
known as primary market and the market in which
investors’ trade outstanding securities is called as
secondary market.
4) Spot and forward markets
The cash or spot market is one were the delivery
takes place immediately and forward or futures market
is one where the delivery takes place at a predetermined
time in future.
5) Exchange traded market and over the counter
market
An exchange traded market has a centralized
organization with standardized procedures. An over the
counter market is a de-centralized market with
customized procedure.
FINANCIAL INTERMEDIARIES
financial intermediaries are those financial institutions that
provide financial services and financial products to the
customers in an efficient manner. Financial instruments
help in borrowing and lending money.
The financial intermediaries in India consists of banking
and non-banking financial institutions, development
finance institutions, insurance companies, investment
banks such as the mutual funds, merchant banks, venture
capital firms and information services companies.

Some of the important money market instruments are

briefly discussed below;

1.Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent
on demand for a very short period. When money is
borrowed or lent for a day, it is known as Call (Overnight)
Money. Intervening holidays and Sunday are excluded for
this purpose. Thus money, borrowed on a day and repaid
on the next working day, is "Call Money". When money is
borrowed or lent for more than a day and up to 14 days, it
is "Notice Money". No collateral security is required to
cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond
14 days is referred to as the term money market. The entry
restrictions are the same as those for Call/Notice Money
except that, as per existing regulations, the specified
entities are not allowed to lend beyond 14 days.

3. Treasury Bills.
Treasury Bills were first issued by the Indian
government in 1917.Treasury Bills are short term (up to
one year) borrowing instruments of the union government.
It is a promise by the Government to pay a stated sum after
expiry of the stated period from the date of issue. It is
issued by the central bank of the country. It is one of the
safest money market instruments and is circulated in the
primary as well as secondary markets.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a borrowing note for
the short-term similar to that of a promissory note. The
maturity date, fixed rate of interest and a fixed value-are
the three components of a certificate of deposit. The term
is generally between 3 months to 5 years. The funds cannot
be withdrawn instantaneously on demand, but has the
facility of being liquidated, if a certain amount of penalty
is paid. The risk associated with certificate of deposit is
higher and so is the return (compared to T-bills). It was in
1989 that the certificate of deposit was first brought into
the Indian money market.

5. Commercial Paper
CP is an unsecured promissory note privately
placed with investors at a discount rate to face value
determined by market forces. The commercial paper is
issued for settling short term liabilities or loans, for
financing of inventories. The minimum maturity period of
CP is 7 days. It was in 1990 that CP was first issued in the
Indian money market.
FINANCIAL SERVICES
A financial service is any kind of service of a financial
nature offered by a financial service provider. All banking
and insurance related services are included in this concept.
These services are intangible and invisible. The financial
services were developed in order to meet the needs of
individuals as well as companies.
Financial service is a very wide field. However we can
classify these services in the following groups:-
1) Banking and financial services:-the banking and
financial services include the following the services such
as-

Custody services
Credit card services
Letter of credit
Mutual fund services
Securities trading services
2) Insurance and insurance related services: insurance
and insurance related financial services include the
following:

Insurance brokerage
 Speciality insurance products
Underwriting of financial risk
Reinsurance
3) Fund based financial services: financial services based
on fund or money is as follows:

Equipments leasing
Hire purchase
Bill discounting
Venture capital
Housing finance
4) Fee based financial services: financial services based
on fees are as follows:

Issue management
Portfolio management
Corporate counseling
Loan based syndication
Arrangement of foreign collaboration
5) Capital market services: capital market is a market for
raising capital. The following are the financial services
rendered by various intermediaries in relation to the capital
market.

Issue management
Merchant banking
REGULATORY SYSTEM
The government of India is responsible to regulate the
financial market in India. The two important regulatory
institutions of the government of India are the Reserve
bank of India (RBI) and the Security and Exchange
board of India (SEBI).
The RBI is the central bank of the country and as the apex
authority; it performs the following central banking and
developmental functions:

It provides currency and operates the clearing system

for the banks.
It serves as the bankers bank
It supervises the operations of credit institutions
It regulates foreign exchange transactions
It controls the fluctuations in the exchange value of
the rupee
It formulates and implements the monetary and credit
policies
It encourages banking development in India.
It influences the allocation of credit

The Securities and exchange board of India is responsible

for dealing with various matters pertaining to the capital
market. The SEBI is responsible for the following:
 Regulate the business in stock exchanges and any
other securities market
Register and regulate the capital market
intermediaries (brokers, merchant brokers, portfolio
managers, etc.)
Register and regulate the working of mutual funds
Promote and regulate self-regulatory organizations
Prohibit fraudulent and unfair trade practices in
security markets
 Prohibit insider training in securities

CONCLUSION-

Financial System of any country consists of financial

markets, financial intermediation and financial instruments
or financial products.
Financial system is an information system, comprised of
one or more applications, that is used for any of the
following: collecting, processing, maintaining,
transmitting, and reporting data about financial events
supporting financial planning or budgeting activities;
accumulating and reporting cost information.
The Indian financial system has undergone structural
transformation over the past decade. The financial sector
has acquired strength, efficiency and stability by the
combined effect of competition, regulatory measures, and
policy environment. While competition, consolidation and
convergence have been recognized as the key drivers of the
banking sector in the coming years.
Class: - S.Y.Banking & Insurance

Subject: - Financial market

Topic:-Indian financial system

Submitted to: - Prof.Tejinder

INDEX

Introduction
Functions of financial system
Financial institutions
Financial markets
Financial intermediaries
Financial services
Regulatory system
-RBI
-SEBI
Conclusion